UK interest rates rise to 5.5%

The Bank of England’s Monetary Policy Committee today voted to raise interest rates by 0.25 percentage points to 5.5%.

In the United Kingdom, output growth has remained firm. Business investment has been stronger than expected and, although indicators of consumer spending have been volatile, the underlying picture is one of steady growth. Credit and broad money continue to grow rapidly. The pace of expansion of the international economy remains robust.

CPI inflation picked up to 3.1% in March. Lower gas and electricity prices and weaker import price inflation mean that CPI inflation is likely to fall back to around the 2% target in the course of this year. But the margin of spare capacity in firms appears limited and there are signs that businesses are more able to push through price increases. Relative to the 2% target, the risks to the outlook for inflation in the medium term consequently remain tilted to the upside.

Against that background, the Committee judged that a further increase in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.

The previous change in Bank Rate was an increase of 0.25 percentage points to 5.25% on 11 January 2007.

Stephen Leonard, Director of Mortgages at Alliance & Leicester, commented: “A rise was expected this month to curb the effect of high inflation rates previously reported by the Bank of England. The mortgage market has already factored in a potential rate rise in anticipation of today’s announcement, and is still reporting strong growth, so any knock-on effect should be minimal.

“House price inflation is significantly down on last year, and the market is currently experiencing a cooling effect, as increased inflation, higher borrowing costs and the possible introduction of HIPs are all leading to consumers tightening their belts, taking stock of their finances and perhaps delaying their decision to buy or sell a property.

“However, indications are that the rate may well be at the top end of the curve so borrowers needn’t panic. As the effect of lower energy prices comes into play and inflationary pressures are likely to slow towards the second half of the year, this could lead to rates falling back again.

“First-time buyers should consider locking into a fixed-rate mortgage enabling them to have the security of regular payments, and allowing them to budget at a level they find comfortable and affordable. There are still deals on the market under 5.5%, and borrowers should act quickly if they want one.

“Competition in the buy-to-let market is intense – consequently there are some good value rates available. With the rate rise, landlords will have to consider either charging the tenant more, or increasing the level of deposit they put down on a property in order to make the economics work for them.”

Barry Naisbitt, Chief Economist at Abbey said: “The decision to raise base rates again by 0.25% to 5.50% was no real surprise to financial markets, particularly after inflation edged up to 2.8% in February and last month’s Monetary Policy Committee decision had been influenced by the turbulence in equity markets that has since abated. If rates were to be raised, May had been seen as a more likely date for a rate increase, because of the detailed reconsideration of the inflation forecast in the Inflation Report.

“Concerns about the prospects for maintaining inflation at its 2% target level into the medium-term, a lack of evidence of inflation expectations reducing and the robust pace of economic activity, are likely to have played a part in the decision. However, I suspect, given the economic uncertainties and that one MPC member voted to cut rates last month, that the vote to raise rates was not unanimous. Markets will be waiting to see the MPC minutes (published on 18th April) to understand more fully the reasoning behind today’s rise."